My premise was that open source presents a fundamental paradox: the larger the community, the better the software, and the less people need to buy support for it. Thus, that open source market opportunities were inherently flawed / paradoxical because you could only sell services for projects that were not terribly successful. Simply put,

You can have a large community who doesn’t need to buy from you or a small community who does.

I think Mike’s overall take on my post was “1990s thinking” because things have evolved over the past decade and businesses now try to monetize open source opportunities in more sophisticated ways. This approach doesn’t actually contradict the paradox I observed, but instead looks for more creative ways around it.

Another key point Mike made was that open source is not a business model. I agree. Open source is a way of developing software. There are many different possible business models for monetizing open source projects.

Rather than attempt to replay the back-and-forth of our discussion, I will simply list my revised take on the 4 basic open source business models.

Professional services. The most basic way to make money around an open source project is to offer related consulting (and training) services. For example, ThinkBigAnalytics, seems to building a consulting business around Hadoop and NoSQL databases (most of which are also open source).

Dual licensing. A vendor offers (1) a free version under the GPL license which freely enables internal use but contaminates on redistribution and (2) a paid version under a different license that doesn’t include GPL’s copyleft provisions. This model reeks of the vig as you force people under threat (of open sourcing their system) if they don’t move to the non-GPL version. In addition, since SaaS or cloud services use but don’t redistribute software, this approach loses its teeth in the SaaS / cloud world.

Open core. A vendor promotes an open source version of a system and makes money by extending it with proprietary additions. In this model, the vendor “has some IP” and is not totally dependent on support subscriptions which may or may not be renewed. Cloudera is executing this strategy by offering both (1) the Cloudera Distribution on an Apache license as well as (2) Cloudera Enterprise which is built on the Cloudera Distribution but also includes production support and management applications.

The open core model clearly sidesteps the paradox I’d outlined because open core vendors offer more than support. Open core is a freemium business model and possesses all the strengths and suffers from all the weaknesses of other freemium models.

First, can you build a large community on the free version or service?

Second, through what mechanism and at what cost you monetize members of that community to a higher-level service?

Third, once monetized at what rate can you keep premium members renewing the premium service or moving them up to an even higher service level?

LinkedIn has done freemium spectacularly well. I’ve never paid them a dime (as a free service user) but somebody paid them the ~$250M they made in the first 9 months of the year. (Turns out it’s about 33% each of premium subscriptions, hiring solutions, and marketing solutions.)

How will open core play out for open source vendors? I don’t know. I do know the freemium code is hard to crack. I do know that freemium models are constantly evolving. I do believe that freemium is a better business model than simply offering support or services. And with the IPO window opening, I do believe we may get a chance to see the financials of a few open core companies in the coming years.

7 responses to “Open Source Business Models, Revisited”

The “open-core” model suffers from the displeasure of mgmt having to divide resources and attention between the platform (core) and what’s on top of it (say, just some additional functionality or even a complete application).

Because revenue comes from what’s on top, mgmt is challenged to prioritize investment in the platform beyond what is needed by what’s on top. It can work, but it’s not simple and there are definitely cases of FAIL.

I think you’ve missed 2 key additional value models (not business models per se) that are driving open source. I would argue that these 2 combined account for vastly more open source code (and value) than the 4 you’ve listed.

In your previous post you said (in bold): “when you play the role of market spoiler it’s much easier to be famous than rich”. I argree with the observation but would make a further comment: famousness gets attention and attention is a scarce and valuable commidity.

The first value model is using open source to get the attention of potential customers and employees. This a massive driver of open source participation. For example 37signals releases numerous OSS products that simplify life for small web development businesses and coincidentally those business are _very_ aware of their product offerings. How much would it cost to generate that same amount of awareness by traditional means?

Facebook is famous at the moment for it’s appetite for engineers and they have released some quite amazing technology (such as Cassandra) as open source. This technology gets the attention of the very best engineers and some of those engineers will contribute fixes and enhancements _back_ to Facebook and thus make the job of selecting and hiring such engineers that much easier.

The second value model is commoditizing the unique software assets of your competitors. Again Facebook is a good example here they are clearly attacking Google’s closely guarded technical secrets with OSS efforts such as Cassandra and Open Compute. Google also commoditized Microsoft’s mobile OS business by offering Android as open source and hacking ~$15 off the manufacturer’s BOM and thus secured the route to mobile consumers for their core products.

Dave, the “freemium” term is often viewed as derogatory by OSS advocates, because it implies that what you get for free is crippleware and you need to pay for the “real” stuff. And I agree that a product strategy based on this crippleware concept is doomed to fail. The difficulty with open core is to maintain the right balance between the free core – which must be compelling to build a community of users – and the commercial extensions/value added features. So far, few vendors have managed to get this balance right…

In the words of Marc Fleury, Open Source is not a business model, it’s a distribution model. Rather than spending time and resources convincing companies to download and try your product, you instead have to spend time and resources convincing companies to actually pay for your product.

If you don’t add a lot of value and it’s not something business rely on, then it’s a tough business model (vlc, etc.). However, when you’re software is used by companies who value their time more than money (I’m channeling Jonathan Schwartz here), you are in good shape.

I’ve worked with numerous companies that were all happy to pay the Redhat, MySql, and JBoss licensing fees once the product was up and running and profitable. Suddenly a few thousand dollars a server seems kind of inconsequential if it means at any moment you can have developers on the phone getting your app back up.

The argument of the Open Source paradox could just as easily be applied to SAAS in general. As software and hardware becomes easier to set up, run, and administer all while being more reliable, than surely people will move away from SAAS? Of course not. Just because a company can, doesn’t mean they want to stray from their core competency to save a few bucks. Same goes for buying support contracts from Open Source companies.

About the dual License, the AGPL license (Affero GPL) has been created to address the SaaS context.
Note that if opening the source is the key, people shouldn’t care about having to open their own source when using GNU GPL licensed products. If they do it is mostly use it in commercial context, so they shouldn’t be offended having to use the commercial license.

Previously, I was SVP/GM of Service Cloud at Salesforce and CEO at unstructured big data provider MarkLogic. Before that, I was CMO at Business Objects for nearly a decade as we grew from $30M to over $1B. I started my career in technical and product marketing positions at Ingres and Versant.

I love disruption, startups, and Silicon Valley and have had the pleasure of working in varied capacities with companies including Alation, AppMesh, Breeze, Data Hero, GainSight, MongoDB, Tableau, Wall-It, and WeMakeItSafer. I also served on the board of Aster Data until its successful sale to Teradata.

I periodically speak to strategy and entrepreneurship classes at the Haas School of Business (UC Berkeley) and Hautes Études Commerciales de Paris (HEC).

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This blog is written by Dave Kellogg and covers a mix of topics including performance management, analytics, big data, and social technologies along with commentary on Silicon Valley, venture capital, and the business of software.